This August at The Fintech Times, we’re looking to highlight some of the amazing things fintechs are doing around the world. We are always hearing about the “latest groundbreaking innovation doing good for the community”, but are these innovations doing good for those in an already advantageous position, or are they helping make the financial world more accessible? To us at The Fintech Times, fintech for good means companies looking to help people who desperately need it, prioritising financial inclusion and sustainability.
In an attempt to answer one of fintech’s most pressing questions – ‘how access to banking services can be made widespread and totally unrestricted’ – here we spoke to a diverse range of industry experts to uncover the best way to address this task:
Financial education and specific services
According to Guy Kashtan, co-founder and CEO of the cross-border financial services platform Rewire, serving the underserved starts with niche product offerings and comprehensive financial education.
Kashtan says: “Big banks have done a sterling job serving huge populations, but they also left gaps where they could not meet the unique needs of specific groups. And marginalised groups, such as migrants, are still underbanked today.
“Fintech has already taken huge steps towards democratising finance, making it simpler and more accessible. And fintechs are popping up to serve unique markets including freelancers, the LGBTQ+ community, people with disabilities and teens and many other underserved markets.
“The key to helping those that are unbanked become banked is to focus on their specific needs – as a business, make them your number one priority. You also need to actively include them in the financial systems by creating inclusive platforms. Fintechs can design their services around markets they know are underserved and create products that are tailored to their chosen market’s unique needs, making their finance management experience much better.
“Some of these groups have been excluded from traditional banking for several reasons, including a lack of financial knowledge. Education is key for many groups that have traditionally been unbanked – building financial literacy so that they become aware of the services available, how to use them and the benefits they bring. Fintechs are in a unique position to be able to educate people on better financial management, so they can start to build a better future for themselves and their families. Sharing knowledge is a vital part of this and private sector companies can play a critical role in accelerating change through knowledge.”
Adding to this, Ken Weber, VP of social impact and sustainability at the currency exchange and remittance network Ripple, sees the new frontier of fintechs as a vital tool to banking the unbanked.
“The existing financial system is antiquated and poorly designed to serve the needs of those in emerging markets and vulnerable communities,” Weber explains. “For the majority of unbanked, the problem is unaddressable by technology: hundreds of millions of people do not have enough cash or are not involved in enough economic activity to be able to take advantage of formal financial services, including those provided by online banks, or so-called app banks and neobanks.
“However, a significant proportion of unbanked people are ready to utilise digital financial services. Today, about three-quarters of people worldwide have an account at a financial institution or through a mobile money provider. That’s a 50 per cent increase in the past 10 years (source: Gates Notes). This means financial services like remittances, interest-bearing checking and savings accounts, and fairly priced credit and loans are newly relevant in the daily lives of hundreds of millions more people. Access to these services is especially important for women, heads of household, farmers, and entrepreneurs.
“In addition to corporate philanthropy and the role of NGOs, governments, central banks and multilateral financial institutions, market forces are a key catalyst in banking the unbanked. A promising new wave of fintech startups in frontier markets – such as Ejara, Kuunda, and Emerging Impact – is focused on serving unbanked populations by introducing fintech products and services designed for local populations, taking into account important cultural context and on-the-ground realities to better serve the needs of the unbanked. Often these fintechs are accelerating their growth by partnering with more established fintechs like Ripple, CELO, Goldfinch and others.
“Blockchain and cryptocurrencies can enable real-time payments and dramatically cut down transaction costs by streamlining the payments process and storing every transaction on a secure distributed ledger. As soon as a transaction is recorded, the receiving party has access to the payment, cutting out middlemen, delays, and unnecessary fees. Revolutionising cross-border payments in this way means that money ends up where it’s needed most, in the hands of the un- and underbanked.”
Mahesh Kedia, VP of GTM strategy and revenue operations at the card issuing platform Marqeta, explains how mobile access could revolutionise access to the services of fintechs.
“The Federal Reserve’s 2019 report on economic wellbeing of US households in 2019 indicated that about 22 per cent of American adults fall in the unbanked or underbanked category,” Kedia comments.
“The unbanked often rely on more expensive alternative financial products (AFPs) such as payday loans, money orders, and other expensive credit facilities. These AFPs typically charge higher fees and interest rates making it challenging for the unbanked and underbanked, and eating into their savings.
“However, many of the unbanked and underbanked population have access to mobile phones and the internet, opening the door for fintechs to help service them in an affordable, equitable, and secure manner. Some examples include:
- Mobile wallets – The unbanked may not have traditional bank accounts but can have verified mobile wallet accounts for shopping and bill payments. Their mobile wallet identity can be used to open a virtual bank account for secure and convenient online banking.
- Minimal to no-fee services – Fintech companies typically have much lower acquisition and operating costs than traditional financial institutions. They are then able to pass on these savings in the form of no-fee or no-minimum-balance products to their customers.
- Credit builders – According to Marqeta’s 2021 State of the Credit report which surveyed 3,500 consumers in the US, UK and Australia, one-third of people surveyed don’t think their credit score is an accurate reflection of their creditworthiness. 73 per cent of those surveyed said they think there should be more solutions available to help them build their credit. Some fintech companies provide a credit line to the unbanked against a portion of their personal savings. This allows them to build a credit history over time.
“By providing access to banking services such as fee-free savings and checking accounts, remittances, credit services, and mobile payments, fintech companies can enrich the lives of the unbanked and help them achieve financial wellbeing.”
The right models for customer finance
“There is an enormous opportunity to address the needs of the 1.7 billion adults that are unbanked globally. Fintechs that use a responsible consumer finance framework have the potential to promote breakthrough innovation in financial inclusion in emerging markets,” explains Octavio Sandoval, director of investments at the private equity firm Illumen Capital.
“Some of the criteria for responsible consumer finance models include credit underwriting based on affordability, transparent pricing and terms with financial literacy incorporated, safeguards to prevent over-indebtedness, and reasonable collection processes.
“For example, Brazilian banks are characterised by high operating costs and low per-employee productivity. As a result, average interest rates in Brazil have been among the highest of the world’s 20 major economies and small-ticket secured loans are unavailable from traditional financial institutions.
“Illumen Capital has exposure to a fintech in Brazil that is a next-generation secured lending platform, democratising access to secured consumer loans in Latin America, with a focus on auto finance, home equity and payroll loans. With its end-to-end technology platform, the fintech offers long-term loans at a fraction of the interest rate of unsecured consumer loans and credit cards.”
Barriers to being banked
Here, Charlotte Colombeau, research and communications executive at the sustainable social enterprise F4ID, provides a blueprint for how more people could enjoy access to financial services.
‘Lack of money, distance to the nearest financial institution, and insufficient documentation were consistently cited by the 1.4 billion unbanked adults as some of the primary reasons they did not have an account.’ The Global Findex Data Report 2021.
“To close the financial inclusion gap tech must be utilised to remove the barriers standing in the way of becoming banked,” Colombeau explains.
“Lack of money – For many people, accessing loans is almost impossible if they are unbanked so some companies are using technology to make loans more accessible through crowdfunding initiatives. Mobile money service providers are also helping to remove barriers by allowing users to pay, receive, transfer and store money – the only requirement being access to a feature phone.
“Distance to the nearest financial institution – Without tech, living near to a bank is essential to be able to know about and access its services. Fintech provides opportunities for financial services to reach people regardless of location.
“Insufficient documentation – Another barrier to becoming banked is the necessity for documentation such as ID when applying for banking services. Many are not able to obtain ID due to array of reasons such as expense, migration status and complications acquiring the required documents. Biometric technology can create digital IDs to enable the most disadvantaged to access services through a slick and simple process.”
Matt Davies, head of UK market development at the consumer credit bureau Nova Credit, sees the application of financial data as a major enabler of banking the unbanked.
Davies continues: “Every year, millions of people emigrate to new countries globally. In doing so they leave behind years (sometimes decades) of credit history making it incredibly difficult to access the simplest credit products and services, like credit cards, car loans or phone contracts, upon arrival in their new country.
“Gaining access to their credit history – or in other words, their own financial data – is absolutely critical to helping more of these people gain the fast, efficient access to fair value, fairly priced credit they need.
“Without it, these people – a huge proportion of whom are creditworthy, credit-hungry individuals – are effectively unbanked in their host countries, impacting hugely on their ability to set up and settle into their new lives.”